Canadian bond issuance in the first half of 2003 was a bit of a mixed bag according to a new report from Standard & Poor’s.

In the first half, gross issuance (by federal, provincial, municipal, and corporate borrowers) totalled $73.7 billion, down 1.2% from the same period a year earlier.

“The weakened state of the market is evident in the fact that most of the growth in the first half was driven by refinancing activity rather than a rise in new borrowing requirements,” says S&P.

“In the corporate sector, an uncertain outlook for the North American economy is still restraining new capital spending, and although bond borrowing has rebounded from very depressed levels at the end of 2002, issuance in this market is running at a below-average pace.”

S&P says that it is important to remember that Canadian corporate borrowers are active in foreign markets, too. “In looking at the total of domestic as well as crossborder activity, what stands out is that gross bond issuance of $32.7 billion in the first half of 2003 was down 11.7% from a year ago. On a net basis, that is gross borrowings less bond retirements, issuance volumes were $10.5 billion, or 12.6% below year-ago levels, and the lowest in five years. Needless to say, by this characterization, the corporate bond market barely had a pulse in the first half of 2003.”

However, it says that a very different picture emerges if you look at activity in the domestic and cross-border markets separately. “Gross issuance in the domestic market totaled $17.5 billion in the first half of 2003, up 7.2% from a year ago to the second highest on record. Net issuance volumes increased even more dramatically, rising 36.3% to $9.4 billion, or to within $2 billion of peak levels reached in the first half of 2000 before the global economic slowdown. “

“All of the problems, therefore, were in the cross-border market, that is the market for Canadian bonds denominated in foreign currencies, where conditions were far less buoyant,” S&P says. It reports that gross issuance declined 26.7% to $15.2 billion and net issuance declined even more, reaching the lowest level in nine years. “This is partly explained by valuation effects caused by the 14.6% appreciation of the Canadian dollar in the first half of 2003. But there were other exchange rate effects at work, notably the broad U.S. dollar depreciation against most major currencies, which caused investors globally to shift their portfolio holdings away from U.S.-dollar denominated assets.”

S&P says that the momentum in domestic issuance is not likely to continue in the second half, because it was driven by opportunistic behavior in the first half. “There already has been a shift in global investment portfolios away from so-called high-yield currencies such as the Canadian dollar on the assumption that falling inflation in Canada, as well as a slowing economy, will remove the interest-rate advantage the Canadian dollar has enjoyed against the U.S. dollar until now.” Also, U.S.-dollar denominated assets are expected to draw renewed investor interest in 2004, as its recovery leads the way.

S&P says that refinancing activity is likely to be the main driver of bond issuance volumes for some time, “and as demand for Canadian-dollar denominated assets ebbs in the period ahead, companies might choose to carry out their refinancing activity in markets where bond maturities come due.”